Payroll outsourcing

What it means

Payroll outsourcing means an outside firm handles the calculation of wages, contributions and tax advances, the reports to insurers and the tax office, and the annual reconciliation. The employer sends the payroll inputs and changes; the provider is responsible for correct calculations and deadlines.

Payroll is an area with constant legislative change and fixed deadlines. For a small firm with a handful of staff it is expensive to employ its own payroll accountant, track the changes and pay for payroll software. An external provider spreads those costs across many clients.

It is often combined with outsourced accounting, since payroll feeds both the books and taxes and a single supplier sees the whole picture. Some companies, however, keep their own books and hand payroll to a specialist because of the sensitivity of the data and the need for confidentiality.

How it works in practice

The monthly cycle starts with attendance, leave, sick leave, bonuses and deductions. The provider produces payslips, a payment summary, the monthly contribution statements and the reports on tax advances. A clear deadline for inputs matters, otherwise the whole schedule slips.

The service usually also covers registering and deregistering employees with insurers, issuing certificates, keeping payroll records and preparing documents for inspections. The scope must be spelled out in the contract, because not every provider handles employment contracts or internal rules, for instance.

Moving payroll requires handing over the current year's history, such as the bases for average earnings, holiday entitlements and data for the annual reconciliation. The switch is easiest at the start of a year, but it can be done in any month.

What to watch out for

Responsibility towards the authorities stays with the employer. If the provider makes a mistake, the company pays the penalty from the insurer or tax office and may claim compensation from the supplier under the contract. It is worth checking the provider's liability insurance and experience.

Payroll data are sensitive and the provider acts as a processor of personal data. Besides the processing agreement, the security of transfers needs attention: sending payslips and inputs by unencrypted email is common but risky practice.